Saving for Later Life

Nigel Mills Excerpts

Tuesday 7th February 2023 Westminster Hall

[Nigel Mills (Amber Valley) (Con)]

It is a pleasure to serve under your chairmanship, Mr Hosie. I congratulate the Chair of the Select Committee, the right hon. Member for East Ham (Sir Stephen Timms), on securing the debate. As a member of the Backbench Business Committee, I thank him for applying for time for us to have a debate on this important topic.

Pension debates are bit like buses: we have had none for ages, and now we have had three in the last four sitting days, so we can certainly explore the topic thoroughly. By some fluke, we have ended up with all the key planks of pensions status being considered over the last few days. We looked at the age at which people should get their state pension and, last night, we looked at increasing pensions to keep them in line with inflation, which is key plank. If we are going to have a model where the state pension should be enough to keep people out of poverty in retirement, and after that is up to people to save for the kind of living that they want, we need to ensure the minimum floor is in the right place. We should welcome the fact the Government did that last night.

However, that leaves our whole pension-saving approach relying on how much people and their employers save for their own retirement. It is almost impossible to avoid the conclusion that people are simply not saving enough. The vast majority of people who work now are not saving enough, and the younger they are the more likely they are not to be saving enough.

The situation is stark. Around 28% of employees are still in defined benefit schemes, mainly in the public sector. Some 87% of those get an employer contribution of over 12% of their pay. However, for the 51% of people in defined contribution schemes, that number falls to 9%, so 91% of people in defined contribution schemes are not getting an employer contribution that is anything like the level that they used to have, or the level that we get.

The situation for the self-employed, as the Chair of the Select Committee set out, is even worse, as only 16% of self-employed people are saving anything like a material amount in a pension. Despite the incredible growth in the employed having a pension, that number for the self-employed is down from 48% 20 years ago, so they are going in the wrong direction. I suspect that is mostly because there is now a lot more self-employment in the gig economy. We can argue whether they are really self-employed, but they are the ones without any pension provision at all. There is clearly a huge problem, and we need to find a way to solve it.

Auto-enrolment was a tremendous start, getting people who were not saving anything to at least save something. The problem, of course, is that they are not saving anything like enough, and they probably do not even know that. The reason why auto-enrolment was chosen and was such a great success was that it did not require any engagement from the individual. In some ways, engagement is a bad thing, because if they do not know that this money is being taken from them and put in a pension scheme, they will not opt out.

We are trying to build a model that requires engagement to boost savings levels on a model where success was based on not having very much engagement. That is a real problem that we must wrestle with carefully. We do not want people to start opting out, but we do want them to realise that they are not going to have much quality of life in retirement if they do not do something materially different.

That brings us to two initiatives. The first is the dashboard and the second is access to guidance. There is a general consensus that the dashboard will be great, and that it will move us forward by enabling people to understand how much they have got in savings. It would be helpful if the Minister could give an update on when people will have live access that enables them to see at least the majority of the pensions they have saved for in their life. I think we would all accept that it is better to have it later than to have something that is rubbish, but let us not have perfection delay it too far. There probably will be some pensions schemes that will not be able to meet any kind of realistic starting date soon, but they will have so few savers in them that there will not be a problem for the vast majority. I hope that some time next year, people will have live access so that they can find out how much pension saving they have.

Having spent years working out the mechanics and how to make the system safe, what we really need to fix is what people will see when they go on the pensions dashboards. Will the Minister set out the process and her vision for it? People need a clear statement of what they have already saved and some objective, fair and consistent comparison with what they need to have saved, what other people have saved by that time and what they are on track to achieve. Otherwise, they will just see a large-looking pot of money. For someone with no other savings, having 20 grand in their pension might look like they are rich and everything is going to be fine.

[Jim Shannon]

I want to pick up on the point about national insurance contributions, and ladies who thought they were on a pension scheme that would reward them when they reached pension age. As an elected representative, I have had a number of constituents come forward over the past few years to tell me that, as they were part-time workers, their national insurance stamps were paid only for a certain period of time. That means that when they reach pension age, their pension is not there for them, although their understanding was that they would have a pension. Does the hon. Gentleman agree that for ladies of the generation now coming to pension age who will not have a pension because they have not paid their national insurance contributions to their full entitlement, the Government should make people more aware so that they can take steps early?

[Nigel Mills]

Yes, the hon. Gentleman is right that we need people to understand if they have gaps in their state pension record. That can be found relatively straightforwardly on the state pension system. The dashboard will need to show the state pension entitlement. I urge ladies who might be in that situation to check, because they ought to have got credits while they were receiving child benefit. They might not have been working, but they had other caring responsibilities. It is always worth checking whether they have entitlements of which they may not be aware, and which the system has not picked up.

Back to my theme on the dashboard: for the dashboard to have the impact we want—for people to change their saving behaviour—the information needs to be there. It needs to say, “Yes, you have saved this amount, but most people by your age have saved this amount. If you want to have £10 grand of extra income in retirement over your state pension, you are not on track to do that, and you need to increase your saving.” We need to find a way to give people a context for their savings information. Otherwise, we will have a meaningless number that might not drive behaviour. It might even perversely make people think they are better off than they are.

It is important to understand what the Government and the regulators will allow to be shown and want to be shown. We must ensure that the data is objective, fair, accurate and preferably consistent, because we do not want people to get slightly different pension target across six schemes; they should be told the same information so they can make an accurate comparison.

The second area is the thorny issue of access to guidance and when people should have it. The Work and Pensions Committee has argued with the Government and the regulator about that for a few years. I hope the noises coming out of the Government about trying to get people who are not in economic activity back into work, and about wanting to do more than a midlife MOT or a financial review, mean that they are moving our way now, but the take-up of Pension Wise has been far lower than everybody wanted it to be. The Minister at the time said that Pension Wise take-up should be the norm. I am not sure how 8% or 14% take-up could be described as the norm; I would have thought that the norm would be just below half, or something. Perhaps the Minister can tell us what she thinks the norm is in that context.

There is no room for doubt: even with the stronger nudge that the Money and Pensions Service is trialling, Pension Wise will not get anywhere near that take-up. It is absolutely right that people should have access to that service when they are about to do something with their pension pot. It is a decision that they will not be able to change for the rest of their life, and if they get it wrong, it could be disastrous. Equally, given that we have so much unused take-up, can we not find a way of getting people to access the scheme earlier, soon after their 50s? That would allow them to get a proper review for half an hour or an hour and have all these things explained to them, so they can see what their situation is while they still have a chance to change it, rather than when it is too late? I am old enough to remember “Bullseye”—at the end of the show they used to say, “Here’s what you could have won.” Having a pension review at the age of 65 and a half that says, “Here’s what you could have had if you had saved a bit more,” is not all that helpful to people, so they should get that intervention earlier.

I was a little disappointed by the Government’s response to the Work and Pensions Committee. They said they did not want to go forward with a trial of auto-enrolling people into a Pension Wise appointment shortly after their 50th birthday. I understand that some pension schemes are willing to put their members forward in some sensible, random way so we can find out whether that works. All we are asking the Government to do is to allow MaPS and regulators to commission one of those trials so that we can see whether enrolling people into an appointment in their early 50s gets positive feedback and changes their behaviour. If it does not work, fine—we will have to find some other way—but it looks to be a low-cost way of seeing whether an intervention might work. It would use capacity that is already there and is not being taken up, and it would be a powerful way forward.

I hope that the Minister will be a bit more supportive than her predecessor. If we want to work out how to give people some kind of nudge, hint or push at an age when they can make a change, that is the best idea out there. If the Government are looking for ideas to get people in that age bracket to come back into work, because they have not saved enough for retirement but they think they have, a half-hour or hour session with an expert who can explain what they really need and what they have really got may be the best way of doing it. The online midlife MOT that the Government have produced contains some very useful information—I am not saying it is a bad thing—but it will not change behaviour. It is not an intervention that will really make a difference.

[Margaret Ferrier]

The Social Market Foundation found that just 25% of people from ethnic minority backgrounds have a workplace pension, and research found that they are more likely to be sceptical about private pensions. Does the hon. Gentleman agree that the Government should do more to educate and reach those groups so they can make sure of their post-retirement financial security?

[Nigel Mills]

The hon. Lady is absolutely right. It is important to explain to people not just from that background, but from all backgrounds, that pensions are a good thing, safe and a good way of saving for retirement. People just do not understand pensions, and they are quite cynical and sceptical about the idea that their money will be there. The more we can do to reassure them, the better.

I have two more quick points to make. We have wrestled for years with the conflict for younger people: should they save for a deposit to get on the housing ladder, or should they save for a pension? The pension industry screams if it is suggested that the former is possibly a good idea. There have been various ideas about how to link the two, but we have not yet made any progress on which one to go for. A key determinant of someone’s financial health in retirement is whether they own a house. If they do, they do not have housing costs to pay and they have an asset that they may be able to downsize to boost their pension pot, so getting young people on the housing ladder earlier is good for their retirement just as saving for a pension is good for their retirement.

[Gareth Davies (Grantham and Stamford) (Con)]

Is my hon. Friend aware of the KiwiSaver scheme in New Zealand? It combines the two aspirations—to save for a pension in later life and to get on the housing ladder—in that someone can divert a portion of their pension saving pot towards a deposit for a house. Is that something that the UK Government should consider?

[Nigel Mills]

There are various ideas out there, and people could use that sort of scheme. They could take a loan out of their pension scheme to get their deposit, and pay it back. We could allow people to be auto-enrolled and have their employer contributions go into their help to buy ISA. There are various ways to try to achieve the aim, but we need to pick one and bring it forward. We have not made the progress that perhaps we should. To be honest, I can see no way of getting more money into young people’s savings to achieve a deposit other than allowing the use of some kind of employer support that is currently going into their pension, because in reality, young people will not have the scope to save much more for themselves. We have already tried to give them the taxpayer top-up through the help to buy ISA. Where else is new money coming from to improve this situation if not from money that is going into their retirement saving?

[David Linden (Glasgow East) (SNP)]

I am grateful to the hon. Member for giving way and to the hon. Member for Grantham and Stamford (Gareth Davies), who intervened before me and talked about the KiwiSaver scheme. I think that that is very interesting, but it strikes me, when considering this topic, that this is a discussion that we have within our little bubble on work and pensions but it is perhaps not something that has been explored in Government—for example, in the Treasury and the Department for Levelling Up, Housing and Communities. Does the hon. Member for Amber Valley (Nigel Mills) agree that there has to be a slightly wider, cross-Government approach if we are seriously to explore the issue?

[Nigel Mills]

I agree. This is a complicated area and it clearly does cross into being a Treasury responsibility; it has to, as it involves quite a lot of pensions issues. But this is a question of coming up with a consensus around a plan for how we achieve the aim. There needs to be a long-term, stable solution. The Treasury did—it must be seven or eight years ago—move to the help to buy ISA and add the taxpayer top-up to it, and that is, in effect, an equivalent to what people get in a pension scheme. There does not have to be a completely closed door, but this is a matter of bringing these things to fruition.

I welcome the announcements made by my hon. Friend the Minister last week at the Pensions and Lifetime Savings Association about the value for money of pension schemes. I have banged on about this for a few years. It is regrettable that the auto-enrolment market is generally still about saying, “We’re going to be really cheap for employers and really easy for you to comply with,” rather than, “Here’s a great pension that you can put your staff in. It will be a really powerful motivation and retention tool, and they will get a really good pension at the end of it.” Now that the market is mature, we need to try to move it away from being cheap and easy to being high quality, with decent returns and a decent service to members. If the Minister is going to make some progress on that, I will greatly welcome it, because having people in the best possible schemes with the best returns, rather than in the cheapest and easiest ones, will actually boost their retirement income.

It is also extremely welcome that the Minister is looking at how we can roll out CDC—collective defined contribution—schemes to many more people. Not having them necessarily being employer-led, and allowing them to be decumulation only, is a really powerful thing for retirement, especially now that we are in a different world. If interest rates stay where they are and people can get a much better annuity—I think the rates are now more like 6% a year rather than 4%—that dramatically changes the assumptions that we have seen for the last 15 or 20 years. Those schemes could become much more attractive and much better for people even than we thought they would be when we introduced the Royal Mail one. The landscape has changed, and the more we can make some progress on these key things, the more chance there is to make a real difference. I hope the Government will make some progress on these matters.

[Kevin Foster (Torbay) (Con)]

It is a genuine pleasure to serve under your chairmanship, Mr Hosie. I congratulate my friend—he genuinely is my friend—the right hon. Member for East Ham (Sir Stephen Timms) on securing the debate, along with the work that the Select Committee has done on this topic under his guidance.

For many people, my constituency of Torbay is the place they want to retire to, as many have already done. Its attractiveness as a tourism resort applies equally for those who want a change of lifestyle and to live amongst its natural beauty and enjoy the many activities that are on offer, which they previously had to put to one side to pursue a career. Given its attractiveness to retirees, Torbay is known for having a population mix that tends to be older than average. As I sometimes reflect on in debates about health and social care, in one of my wards, about 9% of the population is aged over 85. In an area where there is a one in 10 chance of meeting someone aged 86 or older, there are some unique challenges around the provision of public services. For example, at a local supermarket there might be a parent and child parking space, but nowhere to leave a scooter.

The focus of the debate is not those who are already retired, but how the dream of enjoying a comfortable retirement—hopefully in Torbay—can be maintained for those in their 20s, 30s and 40s; and how to ensure that they know how to save, what they need to save and what lifestyle their current level of retirement savings will allow them to enjoy. I welcome the Select Committee’s report and its focus not only on how to further develop auto-enrolment, but on some of the trickier situations around encouraging longer-term savings patterns where someone is self-employed or working in the gig economy.

Before I go too much further, it is worth noting the success of auto-enrolment in that endeavour. That one move has transformed saving for later life in the UK for millions of workers. The proportion of eligible workers saving in a pension rose from 44% in 2012 to 86% in 2020. As has been touched on, participation has remained high at 89% for 40 to 49-year-olds—my own age group—and, encouragingly, at 85% for 22 to 29-year-olds. The latter group is crucial, because small amounts that are put aside early can lead to a strong position for retirement in decades to come, not least with the additional employer contributions.

The financial impact has been significant, with an estimated additional £33 billion in real terms saved into workplace pensions in 2021, compared with 2012. It is also worth noting that with the forthcoming increase in the national living wage to £10.42, more people will go over the earnings threshold and therefore start auto-enrolment, with the savings it brings. Despite that major progress, however, it is clear that many are either still not part of a pension scheme or not saving enough to meet their eventual retirement plans.

The right hon. Member for East Ham rightly highlighted that it is worth people having a clear view of what is adequate so that they can think in their 20s and 30s about what they will need to support themselves in their late 70s and 70s. I think we all realise that there will be a difference in that figure across the UK, particularly if housing costs still need to be met. Someone living in central London will be in a different position from someone in Torbay or Glasgow who owns their property and therefore only has to account for the general lifestyle they want. Of course, if they own their property, they will still have to maintain it. The idea that housing is free when we reach retirement is often disproved when a property that has been owned for 20 or 30 years suddenly needs a new roof or a heating system upgrade. People can be capital-rich on paper because of their property, but they can find their finances quite stressed when they have to meet large repair bills.

There is a particular issue with how we encourage those who do not have a specific employer. That is relevant for many performing roles in Torbay’s tourism sector, and I was pleased that the Select Committee focused on it. The Government are right to say in their response that there is not a single solution for such a diverse part of the workforce. As was often mentioned during covid, self-employment includes everyone from those who are just starting out on their own in a small business, often on a relatively low income, to those in magic circle law firms earning significant sums. However, our focus will always be on those who may struggle in retirement, not on high-flying lawyers who are likely to be only too aware of their pension and saving options—probably their tax options as well—in planning for their retirement.

I agree that we need targeted messages that reach people when they consider their finances, or that we should proactively seek to put information about their retirement in front of them regularly. For example, how can we support self-employed people who work seasonally across the hospitality sector? When do they look at their finances? I share some of the thoughts of my hon. Friend the Member for Amber Valley (Nigel Mills), however. We do not want to have a counterproductive impact by advising people that money will be coming out of their wages each month and having them decide, “Actually, I’ll take the money instead.” In the earlier stages—the first couple of years—the entitlement they have built up will not look particularly impressive, but if it were continued, it would become a worthwhile pot. We do not want a counterproductive outcome overall, but it is certainly something that can be worked on, and we have seen the progress that has been made so far.

Although the Select Committee report was welcome overall, I have some concerns about the suggestion that national insurance payments could become a quasi-auto-enrolment position for the self-employed. There is a real difference between a person saving specifically for their own retirement, to fulfil the dreams or plans they have, and paying tax to fund public services and benefits, as they are required to do under the law. I appreciate that the state pension is linked to making national insurance contributions, but that has always been on the basis of years, rather than “You will build up x amount of contributions, and that will produce y pension.” It is not a pot that people have and that they can access. I can see the idea that when people pay NI they are arguably making contributions towards a state pension, but that is slightly different from them building up their own pension pot, which would be theirs in name as well.

[Nigel Mills]

To clarify, the idea was that because the self-employed pay a lower national insurance rate than those who are employed, we could effectively say to people, “Either you can put that into your own pension pot and top it up, or you can pay national insurance at the same level as somebody who is employed and not get any benefit from it.” It was a way of trying to replicate the auto-enrolment position, where a person puts in money themselves and gets money from somebody else and the taxpayer. It was the only real solution we could find in terms of people getting more bang for their buck.

--- Later in debate ---

[Nigel Mills]

Would the Minister consider setting a target for the number of self-employed people who are regularly saving into a pension scheme by a certain date? I think the rate is currently around 16%. If we could get that up to the 48% it was at 20 years ago, that would be a dramatic improvement and would show whether the efforts to encourage people to save are working. Does she accept that targets are the only way to really drive change?

[Laura Trott]

I think what we need to do is set out a plan. I accept that when we look at the various mechanisms that I have outlined today, we should outline the impact that we think they should have. I commit to go away and have a look at that.

My hon. Friend the Member for Torbay asked what the Department is doing to develop sectoral pension schemes and whether they can be made available for gig economy employers. Collective defined contribution schemes have the potential to transform the UK pensions landscape. He will know that we introduced legislation to allow them for single employers last year, and we are currently consulting on multi-employers. They are really exciting and could be a way forward in this space.

I am conscious of time; I will obviously write to hon. Members to cover anything I do not get to. The Work and Pensions Committee is right to raise concerns about ensuring pensions adequacy. The shift from the promise of retirement income through defined benefit to defined contribution places responsibility on the saver to ensure they have the outcome they want, but I do not think there is widespread understanding of that among the general public. Personal circumstances obviously dictate what individuals consider an adequate level for retirement savings. It is my role as the Pensions Minister to enable people to save adequately, as well as to ensure pension-maximising returns on their savings. The key to that is empowering savers to take control of their financial future. The introduction of simple annual statements, the midlife MOT and the pensions dashboard will make pensions more understandable to the saver and empower them to take control of their retirement outcomes.

My hon. Friend the Member for Amber Valley (Nigel Mills) was entirely right that the pensions dashboard will be crucial to that. We expect to see on the dashboard an understanding of what current savings will lead to as retirement income. What he said about comparing that to what others have was really interesting, and I will take that away.